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A Look At Pure Cycle's Reimbursable Infrastructure Investments

Apr. 05, 2021 8:00 AM ETPure Cycle Corporation (PCYO)55 Comments
Bill Cunningham profile picture
Bill Cunningham


  • Pure Cycle makes major infrastructure investments at its Sky Ranch development for which it ultimately expects to be reimbursed, a portion of which it has already received payment for.
  • Complex accounting rules limit the company's ability to book these expected reimbursements as receivables, or in some cases, even consider the cash already received when reporting revenue and income.
  • It causes the profit on lot sales to be understated, or at least delayed. It also causes Pure Cycle's financial statements to be confusing, but creates hidden value.
  • Understanding the accounting logic Pure Cycle uses for these reimbursables provides clarity in interpreting its financial statements.
  • I also touch upon Pure Cycle's newly announced "Build-to-Rent" segment and the company's near-term prospects.

Source: Pure Cycle Earnings Presentation


Pure Cycle Corporation (NASDAQ:PCYO) is a company with valuable assets that it is beginning to monetize in a significant way. These assets consist mainly of water rights, a scarce resource in the Denver metropolitan area (as well as many other portions of the west), along with a 931-acre property just east of the city of Aurora. This property, known as "Sky Ranch," has various approvals as a master planned community of about 3,400 residential units and over 2 million sf of commercial space, where development began in earnest in 2017.

Pure Cycle's assets were acquired at costs which were generally a fraction of their ultimate realizable value. As a result, the beginning of development of some of these assets was welcome news for many longtime Pure Cycle investors, not just because these assets are beginning to be monetized, but also because it is an affirmation of the unrealized value of the remaining assets.

Although the company's recent financial results are demonstrating that these assets are in fact being monetized quite profitably, the accounting rules Pure Cycle is required to follow results in a deferral of the reporting of some of the actual income being produced by lot sales in Phase 1 of Sky Ranch, which consists of 509 home sites. It also results in underestimates of gross margins as well.

I analyze the impact of these accounting rules (which I consider to be a bit unfair) on Pure Cycle's reported income. I also discuss the reimbursement process for the Sky Ranch infrastructure investments the company makes.

First, a Bit About the Legal Entity "Sky Ranch"

Sky Ranch is not located within the boundaries of any particular town or community but rather is simply a portion of unincorporated Arapahoe County. As a result, a legal entity known

This article was written by

Bill Cunningham profile picture
I am a private investor and occasional mountain climber. I hold an MBA from a top tier business school.

Analyst’s Disclosure: I am/we are long PCYO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (55)

Bill Cunningham profile picture
PCYO announces earnings tomorrow for FY Q1 2023 (ending 11/30), likely after close, and has a cc the next morning at 8:30 am EST. My "back of the envelope" calculation says that revenue will be less than half the FY Q4 revenue (ended 8/30) and the company may struggle to report a profit. (Costs will be down substantially as well since the company allocates costs to lot and tap fee sales...)
Gregg Sterling profile picture
@Bill Cunningham Good to hear you and so many others on the call. I don't see much change in the story other than updating for FCF from rentals. Eventually I'm sure they'll purchase some more land in the area but they certainly aren't in a rush. Other than that I think by next year when they announce some commercial RE deals that might really get people's attention.
Bill Cunningham profile picture
@Gregg Sterling

I would have hoped to have heard a major announcement of some type, but otherwise I thought the call was excellent.

The call seemed to be more of a conversation than a typical company earnings conference call. Mark did a really good job of answering my questions with a lot of detail. He generally provided a lot of good information/data, as opposed to vague marketing spin, in response to most of the questions.
Gregg Sterling profile picture
@Bill Cunningham Mark definitely knows the business forwards and backwards. I think he'd spend a few hours on the call if people kept asking questions.

I think everyone is somewhat impatient waiting for some kind of announcement. I think the problem is at this point in the cycle they are going to have to pay up more than they want to for most land purchases. That's partially why I think many are advocating for some type of buyback. I think they have the capacity to do both. I'm not sure a land deal will get investors that excited since it's probably not going to be accretive to earnings anytime soon so they might as well be opportunistic with buy backs. And the rental units while it could end up being a good investment short term (as long as there isn't any major real estate downturn) I'm wondering if it complicates the story longer term.
@Gregg Sterling I wonder how they could purchase more land given their insistence on buying undervalued assets. I don't see how a large enough parcel would come to market that'd meet PCYO's valuation parameters, that would not be bid to higher levels by other developers.

I have not listened to the call yet.
Gregg Sterling profile picture
Well almost everything went up today. Bought a little bit more today from whoever was dumping. Not sure I understand why the market was up so much but I don't think PCYO is hurt by Fed rate hikes next year.
MasonEE profile picture
I appreciate your work over the past few years. Pure Cycle has moved way forward and has a very strong probability of meeting its goals over the next 8-10 years.
Gregg Sterling profile picture
PCYO call was very encouraging. Second phase seems to be proceeding as expected and they already closed on 152 lots. Their first three rental homes were rented out for higher prices than they originally planned for. Water sales for fracking should be better than this year and even better in 2023 as companies race to drill for oil before the areas get developed. They did $2.8mm in water sales for fracking this FY so who knows.. maybe they can clear $5mm in FY23?

The next few years should be really exciting between Phase 2, fracking, rentals, and the beginning of commercial development. I think people will be really impressed when they see what the commercial property goes for. My guess is they'll sell some land for the big anchor stores and build to lease for others. I think Mark understands investors are antsy for them to do something with their cash surplus and while he won't rush into a deal it sounds like they are working on some opportunities.
Racer-X profile picture
@Gregg Sterling My sentiments exactly. Everybody was upbeat in the Q&A too, recognizing the value. There is nothing negative here. I really love it. I'm glad the market doesn't recognize it.

One day, it will pay a sweet dividend I think. After all, it is a utility. I just love it. Quiet and off the radar.

1000 shares long since July of this year. Not even 4 months yet, and already good 14.67% return, and you can't even get 1,000 shares in one transaction, it's so thinly traded, it seems. Which is a good thing for the future!

07/15/21 Bought 20 of PCYO @ $13.76 (Order #1771) Unassigned -275.20
07/15/21 Bought 100 of PCYO @ $13.767 (Order #1771) Unassigned -1,376.70
07/15/21 Bought 70 of PCYO @ $13.77 (Order #1771) Unassigned -963.90
07/15/21 Bought 810 of PCYO @ $13.7699 (Order #1771) Unassigned -11,153.62

Plus, water is a scarce resource. Lots of problems worldwide. Lots of solutions on the table. Will be interesting to see how it all evolves over the next few decades. Mining comets or the moon? I don't know. But it's not priced correctly, hence the huge world-wide waste. Which, again, is a good PCYO market force.
Bill Cunningham profile picture
There has been an interesting development with Crestone Peak Resources, the Denver based company which bought Conoco Philip's mineral (oil) rights in PCYO's service area a couple of years ago. On Monday it completed a merger with another Denver based company and the combined company's name is now Civitas:


I'll be interested in hearing what PCYO may say about this next Tuesday when FYE (8/31) results are released.
Gregg Sterling profile picture
@Bill Cunningham Thanks for the info. I remember Mark said previously that Crestone, which was run primarily by the Canadian Pension Plan (CPP) , was motivated to drill and not as oil price sensitive as some other companies might have been. Let's hope that's still the case although with WTI where it is now I'm not sure that matters as much. CPP will still have a board seat and be the largest holder post merger.
Bill Cunningham profile picture
@Gregg Sterling

Yes, I remember him saying they were motivated to drill before subdivisions sprouted where they wanted to drill.

I'm inclined to believe this is ultimately good news, but I can't find evidence of a lot going on these past few months while Crestone was under contract.
Bill Cunningham profile picture
@Gregg Sterling

Civitas is doing a conference call at 10 am today. It might provide some interesting insights as to their fracking water needs.


"The company plans to publish an updated presentation on November 4, 2021 on the Civitas website and host a conference call with institutional analysts and investors on November 4, 2021 at 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time). A replay of the call will be available for one week. Dial-in information for the conference call is included below.


Phone Number

Conference ID

Live participant

(877) 793-4362



(855) 859-2056

Any thoughts on today's price action/volume? Instituional investor throwing money at it? Leaked info re a buy-out?
Gregg Sterling profile picture
Good morning. I'm not seeing any particular news today. Any industry related news? Options related? Article published somewhere?
Bill Cunningham profile picture
@Gregg Sterling

No; I know nothing. I've-mailed Mark Harding, the CEO, and will let you know if I hear anything from him.
@Bill Cunningham

Well...selling would be one way to address the undervalued equity and the inability to find equally cheap land/water assets to buy.

It wouldn't be surprising to discover a private equity firm, or the like, sees the value of PCYO just as we do. In fact, it would be delightful.
Gregg Sterling profile picture
Seems like someone with a decent sized position has been selling shares. I sold off some shares when it was around 16 (I have an oversized position anyway) so I've been taking this opportunity to pick some of those shares back up. Story isn't any different as far as I can see.
Bill Cunningham profile picture
@Gregg Sterling

Yeah, pretty much the same; the red hot Denver housing market seems to have cooled a bit.

FYE was 8/31.I assume we'll have ye numbers in mid-October. I'm hoping to see an increase in water sales to energy companies. The company is also hoping to be able to pave some roads in the next section before it gets too cold to do so; that way the new builders can start on the models and on sales.
Gregg Sterling profile picture
@Bill Cunningham I can deal with red hot lava instead of supernova. Plus I think the entry level market will remain in high demand.

Bill Cunningham profile picture
The earnings were a pleasant surprise. They were able to take the entire reimbursable, net of anticipated interest, of $19.4 million into income, compared to my $19.6 million estimate.. The company was also able to record its 5% management fee on the entire reimbursable. of $30.1 million or $1.5 million.

Although no bonds have been issued, Pure Cycle now has a nice $20 million remaining receivable on which they will ultimately earn 6% p.a. on.
Gregg Sterling profile picture
@Bill Cunningham Earnings were definitely good. I was also impressed by the call. There appears to be a lot of new interest in the company since they started doing some outreach.

He laid out the build-to-rent strategy well. Makes me more certain that when it comes time to deal with the commercial land that they will be looking to do leasing deals there and not just sell it all off. I even like the fact that they are not using a third party management company now as they can use the contractors working on site to take care of any issues.

The interesting question will be what investors think as the company seems to be coming a bit of a mish-mosh of businesses although I suspect as they continue to build up a sustainable recurring revenue stream that will make a big difference.
Very helpful article. Do you have any thoughts as to how the charter school will fit into all these calculations?
Bill Cunningham profile picture
It makes Sky Ranch a slightly more attractive community to live in.
@Bill Cunningham

What recommendations would you have for PCYO's management/BoD to improve their cash management?
Bill Cunningham profile picture
@1205 & 1207
I'd like to see them purchase another water utility in the Denver area.
Would you also be a proponent of stock buybacks and/or some form of a dividend policy? Particularly given the low probability that in today's environment it's highly unlikely there is a water utility (or land for that matter) that Management will pay up for?
PCYO's success is largely based on buying undervalued assets and creating value from them. Key words: undervalued assets.

In today's environment where can one find another Sky Ranch for the price PCYO paid? I'm guessing nowhere other than on PCYO's doorstep, i.e., their own stock.

Very interesting opportunity. I like the water theme, but am a bit concerned about this Sky Ranch project. I don't live in Denver, but did have an apartment there for business purposes for about 6 years, ending 18 months ago. The location of Sky Ranch is not particularly attractive from my perspective. East of Denver is not the direction I would want to live. It's really pretty ugly out there. I'll continue to watch the name and if there is a correction, perhaps I'll take a small position.
Alex Pitti profile picture
@Arimnestos pretty ugly?
Bill Cunningham profile picture

"East of Denver is not the direction I would want to live"

Denver is growing like crazy and the only direction where land is available is east. The builders at Sky Ranch can't build homes fast enough. Prices have gone up there by $50-100,000 since they started selling there three years ago.

Personally, I'd prefer Aspen....
@Alex Pitti Yes, have you landed at the Denver Airport before. That is a bit north from Sky Ranch and, to put it mildly, it does not exactly create a great first impression for the city.
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